**Exhibit 13.1**

 

**INTERNATIONAL****ALUMINUM CORPORATION**

 

 

**2004 Annual Report**

 

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**COMPANY PROFILE**

 

**INTERNATIONAL ALUMINUM CORPORATION**is an integrated building productsmanufacturer of diversified lines of quality aluminum and vinyl products. TheCompany is headquartered in Monterey Park, California and has approximately1,500 employees. Operations are conducted through twelve North Americansubsidiaries. The Company’s primary Internet website is located atwww.intlalum.com.

 

**PRODUCTS BY SEGMENT**

 

**COMMERCIAL**— Curtainwalls, window walls, slope glazed systems, storefront framing,entrance doors and frames, commercial operable windows, interior officefronts,office partitions and interior doors and frames for the commercial building andtenant improvement markets. Product information is available at www.usalum.comand www.racointeriors.com.

 

**RESIDENTIAL**— Extensive lines of windows and patio doors manufactured from vinyland aluminum and aluminum wardrobe mirror doors for the residential buildingand remodeling markets. Product information is available at www.intlwindow.com.

 

**ALUMINUM EXTRUSION**— Mill finish, anodized, painted and fabricated aluminum extrusions.Product information is available at www.intlextrusion.com.

 

**CONTENTS**

 
| Financial Highlights                                                                        |   |
|---------------------------------------------------------------------------------------------|--------|
| Letter to  Shareholders                                                                     |   |
| Selected  Financial Data                                                                    |   |
| Management’s Discussion and  Analysis of Financial Condition and Results of Operations |   |
| Quarterly Financial Data                                                                    |   |
| Report  of Independent Registered Public Accounting Firm                                    |   |
| Consolidated Financial  Statements                                                          |   |
| Notes  to Consolidated Financial Statements                                                 |   |
| Corporate  Information                                                                      |   |
| Subsidiaries  by Segment                                                                    |   |

 

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**FINANCIAL****HIGHLIGHTS**Fiscal Years Ended June 30,2004, 2003 and 2002

 
| ** **                                                 | ** ** | **2004**    | ** **  | **2003**    | ** ** | **2002**    | ** ** |
|------------------------------------------------------------|------------|-------------|-------------|-------------|------------|-------------|------------|
| **Operating Results:**                                     |       |        |        |        |       |        |       |
|                                                       |       |        |        |        |       |        |       |
| Net sales                                                  |       | $           | 213,034,000 |        | $          | 192,549,000 |       | $ | 191,429,000 |   |
|                                                       |       |        |        |        |       |        |       |
| Income from continuing operations                          |       | $           | 6,529,000   |        | $          | 4,426,000   |       | $ | 1,485,000 |   |
|                                                       |       |        |        |        |       |        |       |
| Income (loss) from discontinued operations                 |       | 129,000     |        | (1,697,000  | )          | (1,533,000  | )          |
|                                                       |       |        |        |        |       |        |       |
| Cumulative effect of accounting change                     |       | —      |        | —      |       | (7,935,000  | )          |
|                                                       |       |        |        |        |       |        |       |
| Net income (loss)                                          |       | $           | 6,658,000   |        | $          | 2,729,000   |       | $ | (7,983,000 | ) |
|                                                       |       |        |        |        |       |        |       |
| **Financial Data:**                                        |       |        |        |        |       |        |       |
|                                                       |       |        |        |        |       |        |       |
| Net cash provided by operating activities                  |       | $           | 12,146,000  |        | $          | 14,715,000  |       | $ | 11,843,000 |   |
|                                                       |       |        |        |        |       |        |       |
| Capital expenditures                                       |       | 3,482,000   |        | 2,847,000   |       | 11,848,000  |       |
|                                                       |       |        |        |        |       |        |       |
| Working capital                                            |       | 67,860,000  |        | 62,929,000  |       | 58,057,000  |       |
|                                                       |       |        |        |        |       |        |       |
| Long-term debt                                             |       | —      |        | —      |       | —      |       |
|                                                       |       |        |        |        |       |        |       |
| Shareholders’ equity                                  |       | 111,206,000 |        | 109,536,000 |       | 110,805,000 |       |
|                                                       |       |        |        |        |       |        |       |
| **Per Share Data:**                                        |       |        |        |        |       |        |       |
|                                                       |       |        |        |        |       |        |       |
| Continuing operations — Diluted                       |       | $           | 1.54        |        | $          | 1.04        |       | $ | .35 |   |
|                                                       |       |        |        |        |       |        |       |
| Income (loss) from discontinued operations  — Diluted |       | .03         |        | (.40        | )          | (.36        | )          |
|                                                       |       |        |        |        |       |        |       |
| Cumulative effect of accounting change —  Diluted     |       | —      |        | —      |       | (1.87       | )          |
|                                                       |       |        |        |        |       |        |       |
| Net income (loss) — Diluted                           |       | $           | 1.57        |        | $          | .64         |       | $ | (1.88 | ) |
|                                                       |       |        |        |        |       |        |       |
| Dividends declared                                         |       | $           | 1.20        |        | $          | 1.20        |       | $ | 1.20 |   |
|                                                       |       |        |        |        |       |        |       |
| Book value at year end                                     |       | 26.20       |        | 25.80       |       | 26.10       |       |
|                                                       |       |        |        |        |       |        |       |
| Market price at year end                                   |       | 29.10       |        | 21.85       |       | 20.50       |       |

 

1

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**TOOUR SHAREHOLDERS**

 

Afterstumbling a bit in the third quarter, we finished fiscal 2004 on a positivenote with strong earnings performance during our fourth quarter endedJune 30th. Income from continuing operations for the year was $6,529,000or $1.54 per share, a 48% increase over the $4,426,000 or $1.04 per sharereported for fiscal 2003. Sales revenues increased 11% to $213,034,000 from the$192,549,000 in revenue for fiscal 2003. Net income, including discontinuedoperations, was $6,658,000 or $1.57 per share versus $2,729,000 or $.64 pershare. Fiscal 2003 included a $1,697,000 loss from discontinued operationsassociated with the closure of our Denver, Colorado window operation.

 

**Residential Products**

 

OurResidential Products Group continued the momentum from fiscal 2003 and achievedoperating income of $11,049,000 for the year, a 29% increase over fiscal 2003.Sales revenues for the group increased 21% to $65.4 million. Residentialconstruction, buoyed by continued low interest rates, remains strong in themarkets we serve and indications are that it will maintain its strength due topent up demand. Much of our product revenues for this segment are derived fromthe home improvement market which nationwide is forecasted to reach $220billion in calendar 2004 and grow at a rate in excess of 4% through calendar2008.

 

Thedemand for vinyl window and door products continues to grow and we have keptpace by continuing to invest in automated fabrication equipment. Fiscal 2004saw the introduction of our new Lanai Door Series. This hinged in-swing,out-swing vinyl door, available with operable sidelights, has had tremendousacceptance and recently received the Crystal Achievement Award for the MostInnovative Door by the Window&Door Magazine. In response to the marketacceptance, we have ramped up our manufacturing capabilities with CNC equipmentnow in operation at both our California residential products facilities.

 

**Commercial Products**

 

Althoughthe commercial products segment of our business continues to be impacted by thesluggish economy, the Commercial Products Group performed rather well,increasing operating income to $8.3 million, approximately 23% over fiscal2003. While operating income trailed prior high performance levels for theGroup, the improvement was achieved on a less than 2% growth in segmentrevenues to $99.8 million. Nonresidential construction forecasts project agrowth rate of 4% for the 2004 calendar year and improved market conditions wellinto 2005. With major manufacturing centers located throughout North Americaand ten strategically located distribution centers, our Commercial ProductsGroup is well positioned to garner its share of regional market improvement.Customer service and satisfaction remains a top priority, particularly in thetight market conditions which have prevailed for the past three years. Ouremphasis continues to be on providing quality products meeting our customerrequirements, when they need it, on-time and competitively priced.

 

2

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OurStormFrontTM system, designed specifically to meet the rigid code requirementsof the high wind-zone hurricane prone areas, has been well accepted and weanticipate continued growth in product revenues. Only too recently the SouthFlorida and gulf coast region realized the devastating effect of HurricaneCharley, which by last estimate caused damages in the range of $6.5 billion.Many of the structures suffering major damage were constructed and in placewell before the implementation of the current code regulations. We also haveseveral new products either in the research and development stage or about tobe tested and introduced, including blast resistant products for institutionaland governmental buildings, a thermal door for the Northern climate zone and anew improved thermal window wall system for the Canadian market.

 

**Extruded Products**

 

Extrudedproduct sales increased 18.5% over fiscal 2003 on a 14.7% increase in shipmenttonnage. The closing months of fiscal 2004 saw a run-up in metal pricing.Although the marketplace remains extremely competitive, we have generally beensuccessful in passing raw material cost increases through to our customers.Through continuation of stringent cost controls operating income moved to thepositive side of the scale as opposed to the negative results experienced forfiscal 2002 and 2003.

 

Withheavy investment in plant and equipment required in this segment of ourbusiness it is of tantamount importance that sufficient tonnage be processed inorder to generate acceptable operating margins. While approximately 50% of ourvolume is derived from our captive related companies we have aggressivelypursued expanding our external customer base. We now have a resident salesrepresentative in Florida. Revenues from Florida and surrounding statescontinue to grow and we believe this region may eventually become perhaps thelargest revenue producing area of our Texas facility.

 

**Financial Condition**

 

Weconcluded the year with working capital in excess of $67 million, cash and cashequivalents of nearly $16 million and no long-term debt. Capital expendituresfor fiscal 2004 were approximately $3.5 million, substantially below our $6.5million in non-cash depreciation charges. Capital expenditures for fiscal 2005are projected at $3.9 million, excluding the possible facility expansion of ourNorthern California residential products operation which is still in thebidding process.

 

 
| /s/  Cornelius C. Vanderstar |                     | /s/  David C. Treinen |   |
|------------------------------|--------------------------|-----------------------|--------|
| Cornelius  C. Vanderstar     | David  C. Treinen        |
| Chairman  of the Board       | President                |
| Chief  Executive Officer     | Chief  Operating Officer |
|                         |                     |
| September 3,  2004      |                     |

 

3

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**SELECTED FINANCIAL****DATA**

 
| **Year  Ended June 30**     | ** ** | **2004**    | ** **  | **2003**    | ** ** | **2002**    | ** ** | **2001**    | ** **  | **2000**    | ** ** |
|----------------------------------|------------|-------------|-------------|-------------|------------|-------------|------------|-------------|-------------|-------------|------------|
|                             |       |        |        |        |       |        |       |        |        |        |       |
| **Sales by Segment**             |       |        |        |        |       |        |       |        |        |        |       |
| Commercial                       |       | $           | 98,789,000  |        | $          | 97,345,000  |       | $           | 108,510,000 |        | $          | 114,436,000 |   | $ | 112,522,000 |   |
| Residential                      |       | 64,947,000  |        | 53,586,000  |       | 44,352,000  |       | 52,822,000  |        | 52,766,000  |       |
| Aluminum Extrusion               |       | 49,298,000  |        | 41,618,000  |       | 38,567,000  |       | 40,085,000  |        | 46,686,000  |       |
| Total net sales                  |       | $           | 213,034,000 |        | $          | 192,549,000 |       | $           | 191,429,000 |        | $          | 207,343,000 |   | $ | 211,974,000 |   |
|                             |       |        |        |        |       |        |       |        |        |        |       |
| **Earnings**                     |       |        |        |        |       |        |       |        |        |        |       |
| Gross profit                     |       | $           | 43,998,000  |        | $          | 35,350,000  |       | $           | 33,999,000  |        | $          | 39,929,000 |   | $ | 38,873,000 |   |
|                             |       |        |        |        |       |        |       |        |        |        |       |
| Continuing operations            |       | $           | 6,529,000   |        | $          | 4,426,000   |       | $           | 1,485,000   |        | $          | 5,212,000 |   | $ | 1,274,000 |   |
| Discontinued operations*         |       | 129,000     |        | (1,697,000  | )          | (1,533,000  | )          | (578,000    | )           | 305,000     |       |
| Cum. effect of acctg. change*    |       | —      |        | —      |       | (7,935,000  | )          | —      |        | —      |       |
| Net income (loss)                |       | $           | 6,658,000   |        | $          | 2,729,000   |       | $           | (7,983,000  | )           | $          | 4,634,000 |   | $ | 1,579,000 |   |
|                             |       |        |        |        |       |        |       |        |        |        |       |
| Per share:                       |       |        |        |        |       |        |       |        |        |        |       |
| Continuing operations            |       | $           | 1.54        |        | $          | 1.04        |       | $           | .35         |        | $          | 1.23 |   | $ | .30 |   |
| Discontinued operations*         |       | .03         |        | (.40        | )          | (.36        | )          | (.14        | )           | .07         |       |
| Cum. effect of acctg. change*    |       | —      |        | —      |       | (1.87       | )          | —      |        | —      |       |
| Net income (loss) — Diluted |       | $           | 1.57        |        | $          | .64         |       | $           | (1.88       | )           | $          | 1.09 |   | $ | .37 |   |
|                             |       |        |        |        |       |        |       |        |        |        |       |
| Dividends declared               |       | $           | 1.20        |        | $          | 1.20        |       | $           | 1.20        |        | $          | 1.20 |   | $ | 1.20 |   |
|                             |       |        |        |        |       |        |       |        |        |        |       |
| **Financial Data at  Year End**  |       |        |        |        |       |        |       |        |        |        |       |
| Working capital                  |       | $           | 67,860,000  |        | $          | 62,929,000  |       | $           | 58,057,000  |        | $          | 66,097,000 |   | $ | 63,586,000 |   |
| Total assets                     |       | 141,882,000 |        | 133,243,000 |       | 132,724,000 |       | 148,070,000 |        | 154,585,000 |       |
| Long-term debt                   |       | —      |        | —      |       | —      |       | —      |        | —      |       |
| Shareholders’ equity        |       | 111,206,000 |        | 109,536,000 |       | 110,805,000 |       | 123,755,000 |        | 124,326,000 |       |

 

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*Forfurther details relating to discontinued operations and the cumulative effectof an accounting change refer to Notes 8 and 12, respectively.

 

**MANAGEMENT’SDISCUSSION****ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Significant Changes in Results of Operations**

 

**2004 vs. 2003**

 

Netsales for fiscal 2004 increased by $20,485,000 or 10.6% from fiscal 2003.Included is an $11,361,000 or 21.2% increase by the Residential Products Group.Low interest rates and increased consumer confidence continue to stimulate newhome construction, resales of existing homes and home improvement spending. Inaddition, sales at our South Gate, California facility continue to improve dueto increased customer confidence in product quality and customer service thathad suffered during the prolonged strike in fiscal 2002. New productdevelopment and new marketing and advertising programs have also contributed tothe increase. Sales of the Aluminum Extrusion Group increased by $7,680,000 or18.5% when compared to last year. Net tonnage shipped increased by 14.7%. TheExtrusion Group continues to benefit from expanded geographic marketpenetration, particularly the areas served by our Texas facility. Still subjectto a highly competitive market, the Group increased sales prices during thelatter part of fiscal 2004 commensurate with the increased cost of aluminum.Sales of the Commercial Products

 

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Groupincreased by $1,444,000 or 1.5% when compared to last year. This increase wasdue to the substantial gains achieved during the fourth quarter, $4,027,000 or17.1% as compared to the same period last year. Throughout most of the currentyear this group was negatively impacted by a soft commercial constructionmarket coupled with increased competition. Sales of newly developed productlines lessened the negative impact. The fourth quarter results stemmed fromrecently increased construction activity together with increased sales prices.

 

Grossprofit increased to 20.6% of sales in 2004 as compared to 18.4% in 2003. AllGroups achieved reductions, to varying degrees, in their cost percentagesduring fiscal 2004 compared to last year. The Residential Products Group experienceddecreased material, labor and overhead cost percentages compared to the prioryear reflecting production efficiencies attained from additional automation andthe substantially higher sales volume. The Commercial Products Group achievedlower cost percentages as compared to last year mainly due to improved marginsgenerated as a result of the aforementioned fourth quarter sales increase. Inaddition, the prior year had unusually high material costs for some majorprojects at the United States Aluminum facility in Texas. The AluminumExtrusion Group, while absorbing higher material costs compared to last year,posted decreased labor and overhead cost percentages primarily due toproduction efficiencies resulting from the higher tonnage output.

 

Selling,general and administrative expenses increased by $5,107,000 to 15.8% of salesin fiscal 2004 as compared to 14.8% in fiscal 2003. A significant portion,$3,318,000, of the increase during the year reflects additional employment,sales representation and promotional costs related to the increase in sales andachievement of incentive compensation targets. In addition, during fiscal 2004,expense relating to retrospective workers’ compensation policies was $31,000compared to income of $1,065,000 for fiscal 2003.

 

Theswing from net interest expense in the prior year to net interest income in thecurrent year relates to increased funds available for investment during theyear in addition to lower utilization of our foreign lines of credit.

 

Theeffective tax rate increased to 37.7% in fiscal 2004 compared to 35.7% lastyear.

 

**2003 vs. 2002**

 

Netsales for fiscal 2003 increased by $1,120,000 or 0.6% from fiscal 2002.Included is a $9,234,000 or 20.8% increase by the Residential Products Group.In addition to higher levels of new home construction and home improvementremodeling, this increase reflected continued recovery of revenues lost due to2002’s trade union strike at our South Gate, California facility as well asreplacement sales volume formerly directed to large home improvement centers.During 2002 the Residential subsidiaries ceased serving as a stocking supplierfor these stores that we previously supplied on a regional basis. Sales in 2002to large home improvement centers amounted to 9.0% of Residential segment salescompared to only 2.2% for 2003. Sales of the Aluminum Extrusion Group in 2003increased by $3,051,000 or 7.9% when compared to 2002. Net tonnage shipped,particularly in the area served by our Texas facility, increased by 12.5%.Although the U.S. market for aluminum extrusions remained sluggish in 2003, theTexas facility has benefited from expanded geographic market penetration. ThisGroup experienced strong pressure on pricing. Sales of the Commercial ProductsGroup declined by $11,165,000 or 10.3% when compared to last year, reflectiveof the continued soft commercial construction market coupled with increasedcompetition.

 

Grossprofit increased to 18.4% of sales in 2003 as compared to 17.8% in 2002. TheResidential Products Group achieved significantly decreased material, labor andoverhead cost percentages compared to the prior year, reflecting thesubstantially higher sales volume and the continued recovery from prior year’sstrike related inefficiencies. The Aluminum Extrusion Group also experienceddecreased cost percentages as production efficiencies gained from the highertonnage offset lower per unit sales prices. Partially offsetting these

 

5

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decreaseswere higher cost percentages incurred at the Commercial Products Group due tolower sales prices resulting from an increasingly competitive marketplace. Theheightened competition for the reduced number of major projects during 2003especially impacted our United States Aluminum facility in Texas.

 

Selling,general and administrative expenses decreased by $3,595,000 to 14.8% of salesin fiscal 2003 as compared to 16.7% in fiscal 2002. Excluding a $631,000 gainon the sale of a former operating facility that was recognized during the firstquarter 2002, the overall decrease would have been $4,226,000. Of thisdecrease, $1,959,000 was attributable to retrospective workers’ compensationpolicies which provided income of $1,065,000 in fiscal 2003 compared to expenseof $894,000 in fiscal 2002. This swing results from anticipated refunds ofpreviously expensed premiums due to favorable changes in actual and projectedclaim activity. The $2,267,000 remainder of the decrease in 2003 primarilyreflected reduced employment and advertising costs as well as the prior yearcontaining some additional costs for strike related security and legalservices.

 

Netinterest expense decreased in 2003 compared to 2002 reflecting lowerutilization of our foreign lines of credit.

 

Theeffective tax rate increased to 35.7% in fiscal 2003 compared to 23.1% in 2002.The prior year was abnormally low due to available tax credits offsetting alower income base.

 

**Liquidity and Capital Resources**

 

Workingcapital at June 30, 2004 was $67,860,000 compared to $62,929,000 atJune 30, 2003 and $58,057,000 at June 30, 2002. The ratio of currentassets to current liabilities was 3.8 at the end of 2004 compared to 4.6 at theend of both 2003 and 2002. The Company continues to be in excellent position tomeet its short-term operating and discretionary cash requirements. Funds inexcess of current operating requirements are invested in short-terminterest-bearing instruments.

 

Netcash provided by operating activities was approximately $12.1 million, $14.7million and $11.8 million in fiscal 2004, 2003 and 2002, respectively. Cashused in investing activities was utilized for capital expenditures forproperty, plant and equipment of approximately $3,482,000 in 2004, $2,847,000in 2003 and $11,848,000 in 2002 and were financed through internal cash flowand cash reserves. Cash flows included proceeds from sales of excess facilitiesof $2,450,000 in fiscal 2003 and $1,655,000 in fiscal 2002. The Companyprojects net capital expenditures of $3,900,000 for fiscal 2005 for expansion ofproduction capacity, as well as normal recurring capitalized replacement items.The Company anticipates financing these expenditures through internal cash flowand cash reserves. Cash used in financing activities during the past threeyears was utilized mainly for payment of shareholder dividends as authorized bythe Board of Directors.

 

TheCompany had no long-term debt outstanding at the end of 2004, 2003, or 2002.The Company had $22,028,000 in available credit at the end of 2004 undershort-term borrowing arrangements (see Note 3).

 

TheCompany’s financial condition remains strong. The Company believes that itscash, other liquid assets, operating cash flows and borrowing capacity, takentogether, provide more than adequate resources to fund ongoing operatingrequirements and future capital expenditures related to the expansion ofexisting businesses.

 

**Inflation, Trends, and General Considerations**

 

From2002 to 2004, inflation has been relatively low and we believe that inflationhas not had a material affect on our results of operations. Our performance isdependent to a significant extent upon levels of new construction, repair andremodeling for residential and commercial construction, all of which areaffected by such factors as interest rates, consumer confidence and economicoutlook. In the near term, we expect to operate in an environment of relativelystable levels of construction and remodeling activity. However, increases ininterest rates could have a negative impact on the level of housing constructionand remodeling activity.

 

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Thedemand for our products is seasonal, particularly in the colder regions ofNorth America where inclement weather during the winter months usually reducesthe level of building and remodeling activity. We usually experience lowersales levels during the second and third quarters of our fiscal year.

 

**Critical Accounting Policies**

 

TheSummary of Accounting Policies within the Notes to the Consolidated FinancialStatements includes the significant policies and procedures used in thepreparation of the Company’s consolidated financial statements. The followingis a discussion of each of the Company’s critical accounting policies:

 

*Revenue Recognition*

 

Salesare recognized when products are shipped or when services are provided assumingno significant Company obligations remain and the collection of relatedreceivables is probable. Revenue recognition on product sales is not subject tosignificant estimates, as the Company has not experienced significant productreturns.

 

*Valuation of Receivables*

 

TheCompany maintains allowances for doubtful accounts for estimated lossesresulting from the inability of its customers to make required payments. TheCompany performs ongoing credit evaluations of its customers. If the financialcondition of the Company’s customers were to deteriorate, resulting in animpairment of their ability to make payments, additional allowances may berequired. Changes in the credit worthiness of customers, general economicconditions and other factors may impact the level of future write-offs.

 

*Valuation of Inventory*

 

TheCompany periodically reviews inventory items and overall stocking levels toensure that adequate reserves exist for inventory deemed obsolete or excessive.In making this determination, the Company considers historical stocking levels,recent sales of similar items and anticipated demand for these items. Changesin factors such as customer demand, new product offerings and other matters couldaffect the level of inventory obsolescence in the future.

 

*Deferred Income Taxes*

 

Deferredincome taxes are determined based on the difference between the financialstatement and tax bases of assets and liabilities using enacted tax laws andrates (see Note 9).

 

**Current and Pending Accounting Changes**

 

Currentand pending accounting pronouncements are not expected to have a significantimpact on the Company’s results of operations or financial position.

 

**Forward-Looking Information**

 

Thisannual report contains forward-looking statements with respect to the financialcondition, results of operations and business of the Company. Such items aresubject to certain risks and uncertainties that could cause actual results todiffer materially from those set forth in such statements. Readers arecautioned not to place undue reliance on these forward-looking statements,which speak only as of the date the statement was made. The Company undertakesno obligation to publicly update or revise any forward-looking statements,whether as a result of new information, future events or otherwise.

 

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**QUARTERLY****FINANCIAL DATA (UNAUDITED)**For the years endedJune 30, 2004 and 2003

 
| ** **                                   | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|----------------------------------------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| **2004**                                     |       |               |       |                |       |               |       |                |       |
| Net sales                                    |       | $                  | 52,956,000 |                | $          | 50,698,000         |       | $                   | 50,064,000 |   | $ | 59,316,000 |   |
|                                         |       |               |       |                |       |               |       |                |       |
| Gross profit                                 |       | 10,558,000         |       | 11,014,000          |       | 9,473,000          |       | 12,953,000          |       |
|                                         |       |               |       |                |       |               |       |                |       |
| Income from continuing operations            |       | 1,538,000          |       | 1,562,000           |       | 855,000            |       | 2,574,000           |       |
| Income from discontinued operations*         |       | 41,000             |       | 88,000              |       | —             |       | —              |       |
| Net income                                   |       | 1,579,000          |       | 1,650,000           |       | 855,000            |       | 2,574,000           |       |
|                                         |       |               |       |                |       |               |       |                |       |
| Earnings per share — Basic and Diluted: |       |               |       |                |       |               |       |                |       |
| Continuing operations                        |       | .36                |       | .37                 |       | .20                |       | .61                 |       |
| Discontinued operations*                     |       | .01                |       | .02                 |       | —             |       | —              |       |
| Net income                                   |       | .37                |       | .39                 |       | .20                |       | .61                 |       |
|                                         |       |               |       |                |       |               |       |                |       |
| Dividends declared                           |       | .30                |       | .30                 |       | .30                |       | .30                 |       |
|                                         |       |               |       |                |       |               |       |                |       |
| Stock price — High                      |       | 23.87              |       | 28.50               |       | 35.00              |       | 32.86               |       |
|                                         |       |               |       |                |       |               |       |                |       |
| Stock price — Low                       |       | 20.85              |       | 21.72               |       | 25.78              |       | 27.85               |       |
|                                         |       |               |       |                |       |               |       |                |       |
| **2003**                                     |       |               |       |                |       |               |       |                |       |
| Net sales                                    |       | $                  | 49,144,000 |                | $          | 45,784,000         |       | $                   | 47,648,000 |   | $ | 49,973,000 |   |
|                                         |       |               |       |                |       |               |       |                |       |
| Gross profit                                 |       | 9,606,000          |       | 7,106,000           |       | 9,103,000          |       | 9,535,000           |       |
|                                         |       |               |       |                |       |               |       |                |       |
| Income from continuing operations            |       | 912,000            |       | 839,000             |       | 1,129,000          |       | 1,546,000           |       |
| (Loss) from discontinued operations*         |       | (213,000           | )          | (177,000            | )          | (222,000           | )          | (1,085,000          | )          |
| Net income                                   |       | 699,000            |       | 662,000             |       | 907,000            |       | 461,000             |       |
|                                         |       |               |       |                |       |               |       |                |       |
| Earnings per share — Basic and Diluted: |       |               |       |                |       |               |       |                |       |
| Continuing operations                        |       | .21                |       | .20                 |       | .27                |       | .36                 |       |
| Discontinued operations*                     |       | (.05               | )          | (.04                | )          | (.06               | )          | (.25                | )          |
| Net income                                   |       | .16                |       | .16                 |       | .21                |       | .11                 |       |
|                                         |       |               |       |                |       |               |       |                |       |
| Dividends declared                           |       | .30                |       | .30                 |       | .30                |       | .30                 |       |
|                                         |       |               |       |                |       |               |       |                |       |
| Stock price — High                      |       | 20.51              |       | 19.49               |       | 18.74              |       | 22.20               |       |
|                                         |       |               |       |                |       |               |       |                |       |
| Stock price — Low                       |       | 16.05              |       | 16.30               |       | 17.21              |       | 18.15               |       |

 

----

*Forfurther details relating to discontinued operations refer to Note 8.

 

8

----

 

**REPORTOF INDEPENDENT****REGISTERED PUBLIC ACCOUNTING FIRM**

 

Tothe Board of Directors and Shareholders ofInternational Aluminum Corporation

 

Inour opinion, the accompanying consolidated balance sheets and the relatedconsolidated statements of income, cash flows and shareholders’ equity presentfairly, in all material respects, the financial position of InternationalAluminum Corporation and its subsidiaries at June 30, 2004 and 2003, andthe results of their operations and their cash flows for each of the threeyears in the period ended June 30, 2004, in conformity with accountingprinciples generally accepted in the United States of America. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits. We conducted our audits of these statements in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, andevaluating the overall financial statement presentation. We believe that ouraudits provide a reasonable basis for our opinion.

 

Asdiscussed in Note 12, the Company adopted Statement of Financial AccountingStandards No. 142, “Goodwill and Other Intangible Assets”. Accordingly, theCompany ceased amortizing goodwill as of July 1, 2001.

 
| /s/  PricewaterhouseCoopers LLP |   |
|---------------------------------|--------|
| PricewaterhouseCoopers  LLP     |
| Los  Angeles, California        |
| August 19,  2004           |
|                            |

 

**CONSOLIDATED****STATEMENTS OF INCOME**For the years endedJune 30, 2004, 2003 and 2002

 
| ** **                                             | ** ** | **2004**    | ** **  | **2003**    | ** ** | **2002**    | ** ** |
|--------------------------------------------------------|------------|-------------|-------------|-------------|------------|-------------|------------|
| Net sales                                              |       | $           | 213,034,000 |        | $          | 192,549,000 |       | $ | 191,429,000 |   |
| Cost of sales                                          |       | 169,036,000 |        | 157,199,000 |       | 157,430,000 |       |
| Gross profit                                           |       | 43,998,000  |        | 35,350,000  |       | 33,999,000  |       |
| Selling, general and administrative  expenses          |       | 33,555,000  |        | 28,448,000  |       | 32,043,000  |       |
| Income from operations                                 |       | 10,443,000  |        | 6,902,000   |       | 1,956,000   |       |
| Interest income                                        |       | 50,000      |        | 11,000      |       | 44,000      |       |
| Interest expense                                       |       | (20,000     | )           | (26,000     | )          | (69,000     | )          |
| Income from continuing operations before  income taxes |       | 10,473,000  |        | 6,887,000   |       | 1,931,000   |       |
| Provision for income taxes                             |       | 3,944,000   |        | 2,461,000   |       | 446,000     |       |
| Income from continuing operations                      |       | 6,529,000   |        | 4,426,000   |       | 1,485,000   |       |
| Income (loss) from discontinued operations             |       | 129,000     |        | (1,697,000  | )          | (1,533,000  | )          |
| Cumulative effect of accounting change                 |       | —      |        | —      |       | (7,935,000  | )          |
| Net income (loss)                                      |       | $           | 6,658,000   |        | $          | 2,729,000   |       | $ | (7,983,000 | ) |
|                                                   |       |        |        |        |       |        |       |
| Earnings per share - Basic and Diluted:                |       |        |        |        |       |        |       |
| Continuing operations                                  |       | $           | 1.54        |        | $          | 1.04        |       | $ | .35 |   |
| Discontinued operations                                |       | .03         |        | (.40        | )          | (.36        | )          |
| Cumulative effect of accounting change                 |       | —      |        | —      |       | (1.87       | )          |
| Total                                                  |       | $           | 1.57        |        | $          | .64         |       | $ | (1.88 | ) |

 

Seeaccompanying notes to consolidated financial statements.

 

9

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**CONSOLIDATEDBALANCE SHEETS**June 30, 2004 and 2003

 
| ** **                                                                        | ** ** | **2004**    | ** **  | **2003**    | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------|-------------|-------------|------------|
| **Assets**                                                                        |       |        |        |        |       |
|                                                                              |       |        |        |        |       |
| Current assets:                                                                   |       |        |        |        |       |
| Cash and cash equivalents                                                         |       | $           | 15,964,000  |        | $          | 12,570,000 |   |
| Accounts receivable, less allowance of  $1,447,000 in 2004 and $1,384,000 in 2003 |       | 39,030,000  |        | 34,336,000  |       |
| Inventories                                                                       |       | 32,286,000  |        | 28,551,000  |       |
| Prepaid expenses and deposits                                                     |       | 1,864,000   |        | 2,583,000   |       |
| Deferred income taxes                                                             |       | 2,767,000   |        | 2,239,000   |       |
| Total current assets                                                              |       | 91,911,000  |        | 80,279,000  |       |
|                                                                              |       |        |        |        |       |
| Property, plant and equipment, at cost                                            |       | 121,828,000 |        | 120,829,000 |       |
| Accumulated depreciation                                                          |       | (73,227,000 | )           | (68,999,000 | )          |
| Net property, plant and equipment                                                 |       | 48,601,000  |        | 51,830,000  |       |
|                                                                              |       |        |        |        |       |
| Other assets:                                                                     |       |        |        |        |       |
| Goodwill                                                                          |       | 609,000     |        | 605,000     |       |
| Other                                                                             |       | 761,000     |        | 529,000     |       |
| Total other assets                                                                |       | 1,370,000   |        | 1,134,000   |       |
|                                                                              |       | $           | 141,882,000 |        | $          | 133,243,000 |   |
|                                                                              |       |        |        |        |       |
| **Liabilities and  Shareholders’ Equity**                                    |       |        |        |        |       |
|                                                                              |       |        |        |        |       |
| Current liabilities:                                                              |       |        |        |        |       |
| Accounts payable                                                                  |       | $           | 10,858,000  |        | $          | 7,407,000 |   |
| Accrued liabilities                                                               |       | 11,903,000  |        | 9,054,000   |       |
| Advances payable to banks                                                         |       | 202,000     |        | 590,000     |       |
| Income taxes payable                                                              |       | 1,088,000   |        | 299,000     |       |
| Total current liabilities                                                         |       | 24,051,000  |        | 17,350,000  |       |
|                                                                              |       |        |        |        |       |
| Deferred income taxes                                                             |       | 6,625,000   |        | 6,357,000   |       |
| Total liabilities                                                                 |       | 30,676,000  |        | 23,707,000  |       |
|                                                                              |       |        |        |        |       |
| Commitments and contingencies (Note 4)                                            |       |        |        |        |       |
|                                                                              |       |        |        |        |       |
| Shareholders’ equity:                                                        |       |        |        |        |       |
| Common stock                                                                      |       | 4,765,000   |        | 4,765,000   |       |
| Paid-in capital                                                                   |       | 4,123,000   |        | 4,123,000   |       |
| Retained earnings                                                                 |       | 101,140,000 |        | 99,576,000  |       |
| Accumulated other comprehensive income                                            |       | 1,178,000   |        | 1,072,000   |       |
| Total shareholders’ equity                                                   |       | 111,206,000 |        | 109,536,000 |       |
|                                                                              |       | $           | 141,882,000 |        | $          | 133,243,000 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

10

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**CONSOLIDATED STATEMENTS OF CASH FLOWS**For the years endedJune 30, 2004, 2003 and 2002

 
| ** **                                      | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**    | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|-------------|------------|
| Cash flows from operating activities:           |       |       |       |       |       |        |       |
| Net income (loss)                               |       | $          | 6,658,000  |       | $          | 2,729,000   |       | $ | (7,983,000 | ) |
| Adjustments for noncash transactions:           |       |       |       |       |       |        |       |
| Depreciation and amortization                   |       | 6,526,000  |       | 6,985,000  |       | 6,988,000   |       |
| Change in deferred income taxes                 |       | (260,000   | )          | (91,000    | )          | 608,000     |       |
| Gain on sale of fixed assets                    |       | —     |       | —     |       | (631,000    | )          |
| Loss on discontinued operations                 |       | —     |       | 1,144,000  |       | 1,175,000   |       |
| Cumulative effect of accounting change          |       | —     |       | —     |       | 7,935,000   |       |
| Changes in assets and liabilities:              |       |       |       |       |       |        |       |
| Receivables                                     |       | (4,667,000 | )          | (2,362,000 | )          | 5,798,000   |       |
| Inventories                                     |       | (3,714,000 | )          | 3,894,000  |       | 3,392,000   |       |
| Prepaid expenses and other                      |       | 490,000    |       | 899,000    |       | (1,270,000  | )          |
| Accounts payable                                |       | 3,434,000  |       | 570,000    |       | (2,687,000  | )          |
| Accrued liabilities                             |       | 2,883,000  |       | 745,000    |       | (1,052,000  | )          |
| Income taxes payable                            |       | 796,000    |       | 202,000    |       | (430,000    | )          |
| Net cash provided by operating activities       |       | 12,146,000 |       | 14,715,000 |       | 11,843,000  |       |
|                                            |       |       |       |       |       |        |       |
| Cash flows from investing activities:           |       |       |       |       |       |        |       |
| Capital expenditures                            |       | (3,482,000 | )          | (2,847,000 | )          | (11,848,000 | )          |
| Proceeds from sales of capital assets           |       | 212,000    |       | 2,824,000  |       | 1,810,000   |       |
| Net cash used in investing activities           |       | (3,270,000 | )          | (23,000    | )          | (10,038,000 | )          |
|                                            |       |       |       |       |       |        |       |
| Cash flows from financing activities:           |       |       |       |       |       |        |       |
| Dividends paid to shareholders                  |       | (5,094,000 | )          | (5,094,000 | )          | (5,094,000  | )          |
| Net borrowings under lines of credit            |       | (394,000   | )          | (575,000   | )          | 869,000     |       |
| Net cash used in financing activities           |       | (5,488,000 | )          | (5,669,000 | )          | (4,225,000  | )          |
|                                            |       |       |       |       |       |        |       |
| Effect of exchange rate changes                 |       | 6,000      |       | 52,000     |       | —      |       |
|                                            |       |       |       |       |       |        |       |
| Net change in cash and cash equivalents         |       | 3,394,000  |       | 9,075,000  |       | (2,420,000  | )          |
| Cash and cash equivalents at beginning of  year |       | 12,570,000 |       | 3,495,000  |       | 5,915,000   |       |
| Cash and cash equivalents at end of year        |       | $          | 15,964,000 |       | $          | 12,570,000  |       | $ | 3,495,000 |   |
|                                            |       |       |       |       |       |        |       |
| Supplemental cash flow information:             |       |       |       |       |       |        |       |
| Interest payments                               |       | $          | 20,000     |       | $          | 28,000      |       | $ | 67,000 |   |
| Income tax payments                             |       | $          | 3,184,000  |       | $          | 1,596,000   |       | $ | 1,011,000 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

11

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**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’EQUITY**For the years endedJune 30, 2004, 2003 and 2002

 
| ** **                  | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Retained** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | ** ** | ** **  |
|-----------------------------|------------|------------------|------------|-------------|------------|--------------|------------|---------------------------------------|------------|------------|-------------|
| ** **                  | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**  | ** ** | **Earnings**                          | ** ** | **Income** | ** **  | **Total** | ** ** |
| Balance, June 30, 2001 |       | 4,244,794        |       | $           | 4,765,000  |         | $          | 4,123,000                             |       | $          | 115,018,000 |   | $ | (151,000 | ) | $ | 123,755,000 |   |
|                        |       |             |       |        |       |         |       |                                  |       |       |        |   |   |
| Net loss                    |       |             |       |        |       |         |       | (7,983,000                            | )          |       |        | (7,983,000 | ) |
| Translation adjustment      |       |             |       |        |       |         |       |                                  |       | 127,000    |        | 127,000 |   |
| Total comprehensive income  |       |             |       |        |       |         |       |                                  |       |       |        | (7,856,000 | ) |
| Cash dividends              |       |             |       |        |       |         |       | (5,094,000                            | )          |       |        | (5,094,000 | ) |
| Balance, June 30, 2002 |       | 4,244,794        |       | 4,765,000   |       | 4,123,000    |       | 101,941,000                           |       | (24,000    | )           | 110,805,000 |   |
|                        |       |             |       |        |       |         |       |                                  |       |       |        |   |   |
| Net income                  |       |             |       |        |       |         |       | 2,729,000                             |       |       |        | 2,729,000 |   |
| Translation adjustment      |       |             |       |        |       |         |       |                                  |       | 1,096,000  |        | 1,096,000 |   |
| Total comprehensive income  |       |             |       |        |       |         |       |                                  |       |       |        | 3,825,000 |   |
| Cash dividends              |       |             |       |        |       |         |       | (5,094,000                            | )          |       |        | (5,094,000 | ) |
| Balance, June 30, 2003 |       | 4,244,794        |       | 4,765,000   |       | 4,123,000    |       | 99,576,000                            |       | 1,072,000  |        | 109,536,000 |   |
|                        |       |             |       |        |       |         |       |                                  |       |       |        |   |   |
| Net income                  |       |             |       |        |       |         |       | 6,658,000                             |       |       |        | 6,658,000 |   |
| Translation adjustment      |       |             |       |        |       |         |       |                                  |       | 106,000    |        | 106,000 |   |
| Total comprehensive income  |       |             |       |        |       |         |       |                                  |       |       |        | 6,764,000 |   |
| Cash dividends              |       |             |       |        |       |         |       | (5,094,000                            | )          |       |        | (5,094,000 | ) |
| Balance, June 30, 2004 |       | 4,244,794        |       | $           | 4,765,000  |         | $          | 4,123,000                             |       | $          | 101,140,000 |   | $ | 1,178,000 |   | $ | 111,206,000 |   |
|                             |            |                  |            |             |            |              |            |                                       |            |            |             |  |  |  |  |  |  |  |  |

 

Seeaccompanying notes to consolidated financial statements.

 

12

----

 

**NOTESTO CONSOLIDATED****FINANCIAL STATEMENTS**

 

**Note 1. Significant Accounting Policies and Procedures**

 

**Description of Business and Principles of Consolidation**

 

InternationalAluminum Corporation (the Company) is an integrated building productsmanufacturer of diversified lines of quality aluminum and vinyl products. Theconsolidated financial statements include the accounts of the Company and itsdomestic and foreign subsidiaries. All significant intercompany transactionsand accounts have been eliminated in consolidation. Certain reclassificationsof prior year information were made to conform to the current presentation.

 

**Revenue Recognition**

 

Salesare recognized when products are shipped or services are provided assuming nosignificant Company obligations remain and the collection of relatedreceivables is probable. Shipping charges billed to customers are included inNet Sales and shipping and handling charges incurred by the Company are includedin Cost of Sales.

 

**Estimates and Assumptions**

 

Thepreparation of the consolidated financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the amountsreported in the financial statements and accompanying notes. Actual resultscould differ from those estimates.

 

**Cash and Cash Equivalents**

 

Cashand cash equivalents include cash on hand and marketable securities withoriginal maturities of three months or less.

 

**Concentrations of Credit Risk**

 

TheCompany’s exposure to credit risk relates primarily to trade accountsreceivable from customers located throughout North America. The Companyperforms ongoing credit evaluations of its customers’ financial condition. Anallowance for doubtful accounts is established based upon factors surroundingthe credit risk of specific customers, historical trends and other information.The Company did not have sales exceeding 5% to any single customer in 2004,2003 or 2002.

 

**Foreign Currency Translation**

 

Assetsand liabilities of the Company’s foreign subsidiaries are translated into U.S.dollars at year-end exchange rates and revenues and expenses are translated ataverage rates prevailing during the year. Local currency is considered to bethe functional currency. Translation adjustments are deferred into accumulatedother comprehensive income, a separate component of shareholders’ equity.Foreign currency transaction gains and losses are included in results ofoperations as incurred.

 

**Depreciation and Amortization**

 

Depreciationand amortization are provided over the estimated useful lives of the assets (upto 40 years for buildings and 3 to 20 years for machinery and equipment) or theremaining terms of the leases, whichever is shorter, using the straight-linemethod for financial reporting purposes and accelerated methods for taxpurposes.

 

**Goodwill**

 

Theexcess of the purchase price over the underlying book value of the companiesacquired is classified as “Goodwill”. Upon adoption of Statement of FinancialAccounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”,effective July 1, 2001, the amortization of these costs was discontinued.At June 30, 2004 and June 30, 2003 the related amount of $1,171,000had accumulated amortization of $562,000 and $566,000, respectively. Thenominal decrease during 2004 relates to the effect of applying fluctuatingforeign exchange rates to balances pertaining to our Canadian subsidiaries. Inaccordance with SFAS 142, management reviews the carrying value of goodwill forrecoverability based on estimated fair values of the reporting units in thefourth quarter of each year or when events or changes in circumstancesindicate, in management’s judgment, that the carrying value may not berecoverable. The fair values of the reporting units were based uponmanagement’s estimate of a multiple of undiscounted cash flows. The Companyconsiders operating results, trends and prospects of the Company, as well as competitivecomparisons. The Company also takes into consideration competition within thebuilding materials industry and any other events or circumstances which mightindicate potential impairment. No impairments have been recorded since theinitial adoption of SFAS 142.

 

13

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**Investment Tax Credits**

 

Investmenttax credits are accounted for in the period earned in accordance with theflow-through method.

 

**Income Taxes**

 

TheCompany accounts for income taxes under SFAS No. 109, “Accounting for IncomeTaxes”. SFAS No. 109 requires an asset and liability approach for financialreporting for income taxes. Under SFAS No. 109, deferred taxes are provided fortemporary differences between the carrying values of assets and liabilities forfinancial reporting and tax purposes at the enacted rates at which thesedifferences are expected to reverse.

 

**Long-Lived Assets**

 

Wheneverevents indicate that the carrying values of long-lived assets may not berecoverable, the Company evaluates the carrying values of such assets usingfuture undiscounted cash flows. Management believes that, as of June 30,2004, the carrying values of such assets are appropriate.

 

**Advertising Expense**

 

TheCompany expenses advertising costs as incurred. Advertising expenses ofapproximately $2,001,000, $1,568,000 and $1,809,000 were charged to selling,general and administrative expenses for the years ended June 30, 2004,2003 and 2002, respectively.

 

**Stock Based Compensation**

 

TheCompany granted stock options for the purchase of common stock to certainexecutive and managerial employees under the Company’s 1991 Stock Option Plan,whose expired granting authority has been transferred to the successor plan,the 2001 Stock Option Plan. Options have an exercise price equal to the marketprice of the stock on the date of grant, a term of ten years and generallybecome exercisable over a five-year period. The Company applies AccountingPrinciples Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees”,and related Interpretations in accounting for the plan. Under APB No.25,compensation cost, if any, is recognized over the respective vesting periodbased on the difference, if any, on the date of grant, between the fair valueof the Company’s common stock and the exercise price. All options issued havean exercise price equal to the fair value on the date of grant. Accordingly, nocompensation cost has been recognized for those stock options. OnDecember 31, 2002, the FASB issued SFAS No. 148, “Accounting forStock-Based Compensation — Transition and Disclosure”, which amends SFAS No.123, “Accounting for Stock-Based Compensation”. SFAS No. 148’s transitionguidance and provisions for disclosures are effective for fiscal years endingafter December 15, 2002. The Company did not adopt fair value accountingfor employee stock options under SFAS No. 123 and SFAS No. 148, but willcontinue to disclose the required pro-forma information in the notes to theconsolidated financial statements. There would have been no material change inreported net income and earnings per share had compensation cost beendetermined based on the fair value at the grant dates as prescribed by SFAS123.

 

 

**Note 2. Balance Sheet Components**

 
| **Inventories,  at the Lower of FIFO Cost or Market** | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|-------------------------------------------------------|------------|-----------|------------|-----------|------------|
| Raw materials                                         |       | $         | 26,790,000 |      | $          | 23,374,000 |   |
| Work in process                                       |       | 553,000   |       | 430,000   |       |
| Finished goods                                        |       | 4,943,000 |       | 4,747,000 |       |
|                                                  |       | $         | 32,286,000 |      | $          | 28,551,000 |   |

 
| **Property,  Plant and Equipment, at Cost** | ** ** | **2004**   | ** **  | **2003**   | ** ** |
|---------------------------------------------|------------|------------|-------------|------------|------------|
| Land                                        |       | $          | 6,857,000   |       | $          | 6,846,000 |   |
| Buildings and improvements                  |       | 29,481,000 |        | 29,448,000 |       |
| Machinery and equipment                     |       | 85,450,000 |        | 84,451,000 |       |
| Construction in process                     |       | 40,000     |        | 84,000     |       |
|                                        |       | $          | 121,828,000 |       | $          | 120,829,000 |   |

 

14

----

 
| **Accrued  Liabilities**       | ** ** | **2004**  | ** ** | **2003**  | ** ** |
|--------------------------------|------------|-----------|------------|-----------|------------|
| Wages and compensated absences |       | $         | 7,474,000  |      | $          | 4,704,000 |   |
| Taxes, other than income taxes |       | 1,147,000 |       | 1,470,000 |       |
| Dividends                      |       | 1,273,000 |       | 1,273,000 |       |
| Other                          |       | 2,009,000 |       | 1,607,000 |       |
|                           |       | $         | 11,903,000 |      | $          | 9,054,000 |   |

 

**Note 3. Short-Term Debt and Lines of Credit**

 

TheCompany has a loan agreement with a domestic bank providing for a $20,000,000unsecured short-term line of credit. There were no amounts outstanding underthe agreement at June 30, 2004 or June 30, 2003. Additionally theCompany’s foreign subsidiaries have loan agreements with a foreign bankproviding for $2,250,000 in secured short-term lines of credit, at theprevailing Canadian prime interest rate (3.75% as of June 30, 2004). Therewas $202,000 outstanding under the foreign agreements at June 30, 2004 and$590,000 outstanding at June 30, 2003.

 

**Note 4. Commitments and Contingencies**

 

TheCompany is committed under real property lease agreements expiring at variousdates to 2009. Certain of the leases have renewal options for periods up tofive years and others provide for rent revisions at various dates. Under theleases the Company is obligated to pay property taxes, insurance andmaintenance. All facility leases are classified as operating leases.

 

Realproperty rental expense was $857,000 in 2004, $991,000 in 2003 and $1,000,000in 2002. Real property rental commitments are $798,000 in 2005, $577,000 in2006, $275,000 in 2007, $160,000 in 2008 and $43,000 in 2009.

 

TheCompany is party to various claims, legal actions and complaints arising in theordinary course of business. In the opinion of management, all such matters arewithout merit or are of such kind, or involve such amounts, that an unfavorabledisposition would not have a material adverse effect on the consolidatedfinancial position, results of operations or cash flows of the Company.

 

**Note 5. Stock Options**

 

Thetransactions for shares under options for the 1991 and 2001 Stock Option Plansfor the three years ended June 30, 2004 were:

 
| ** **                                  | ** ** | **Outstanding**       | ** ** | **Exercisable**                      | ** ** |
|---------------------------------------------|------------|-----------------------|------------|--------------------------------------|------------|
| ** **                                  | ** ** | **Number Of  Shares** | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Number Of  Shares** | ** ** | **Weighted-Average  Exercise Price** | ** ** |
| Outstanding, June 30, 2001             |       | 120,500               |       | $                                    | 28.56      |   | 111,100 |   | $ | 28.36 |   |
| Forfeited                                   |       | (12,500               | )          | 28.71                                |       |   |   |   |   |
| Outstanding, June 30, 2002             |       | 108,000               |       | 28.54                                |       | 103,800 |   | 28.45 |   |
| Forfeited                                   |       | —                |       |                                 |       |   |   |   |   |
| Outstanding, June 30, 2003             |       | 108,000               |       | 28.54                                |       | 108,000 |   | 28.54 |   |
| Forfeited                                   |       | —                |       |                                 |       |   |   |   |   |
| Outstanding, June 30, 2004             |       | 108,000               |       | 28.54                                |       | 108,000 |   | 28.54 |   |
|                                        |       |                  |       |                                 |       |   |   |   |   |
| Stock Option Summary at June 30, 2004: |       |                  |       |                                 |       |   |   |   |   |
| $28.00-$31.56 (Life: 1.4-3.6 years)         |       | 108,000               |       | 28.54                                |       | 108,000 |   | 28.54 |   |
| Available for future grants                 |       | 389,700               |       |                                 |       |   |   |   |   |
|                                             |            |                       |            |                                      |            |  |  |  |  |  |  |

 

15

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**Note 6. Earnings Per Share**

 

Basicearnings per share is computed by dividing net income by the weighted averagenumber of shares of common stock outstanding. Diluted earnings per share iscomputed by dividing net income by the weighted-average common and potentiallydilutive common equivalent shares outstanding determined as follows:

 
| ** **                                                      | ** ** | **2004**  | ** ** | **2003**  | ** ** | **2002**  | ** ** |
|-----------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Weighted-average shares outstanding used to  compute basic EPS  |       | 4,244,794 |       | 4,244,794 |       | 4,244,794 |       |
| Incremental shares issuable upon the  exercise of stock options |       | 3,401     |       | —    |       | —    |       |
| Shares used to compute diluted EPS                              |       | 4,248,195 |       | 4,244,794 |       | 4,244,794 |       |

 

Incrementalshares issuable upon the assumed exercise of outstanding stock options arecomputed using the average market price during the related period.

 

**Note 7. Capital Stock**

 

TheCompany has 500,000 shares of preferred stock authorized, with a $10 par value,none of which is outstanding. There are 10,000,000 shares of common stockauthorized, $1 par value, of which 4,244,794 shares were outstanding atJune 30, 2004 and 2003.

 

**Note 8. Acquisitions and Divestitures**

 

Duringfiscal years 2003 and 2002, the Company ceased operations of InternationalWindow-Colorado and Maestro Products, respectively, window and doorsubsidiaries which were components of the Residential Products segment. Inaccordance with SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets”, the Company wrote down the net assets of these subsidiariesto their estimated net realizable value and reported their results asdiscontinued operations. Amounts in the income statements and related notes forall periods shown were restated to reflect discontinued operations accounting.Included in consolidated results is $1,320,000 for fiscal 2003 relatedprimarily to inventory and goodwill write-downs at InternationalWindow-Colorado and $1,175,000 for fiscal 2002 for write-downs of variousassets at Maestro Products, primarily inventory. Due to favorable accountsreceivable collections and the sale of a portion of the Window-Coloradoequipment and inventory the Company recognized a pre-tax gain of $215,000 infiscal 2004. In fiscal 2003 the Company realized a pretax gain of $176,000 inexcess of projections on sale of the real property of Maestro Products. Each ofthe gains have likewise been classified as discontinued operations. The Companydoes not anticipate any future activity with respect to either of thesesubsidiaries.

 

Summarizedresults of the discontinued businesses are shown separately as discontinuedoperations in the accompanying income statements. Results of the discontinuedoperations, in thousands of dollars, are as follows:

 
|                                            |   | **2004** | ** ** | **2003** | ** ** | **2002** |   |
|-------------------------------------------------|--------|----------|------------|----------|------------|----------|--------|
| Net sales                                       |   | $        | —     |     | $          | 1,787    |   | $ | 3,697 |   |
|                                            |   |     |       |     |       |     |   |
| Income (loss) before income taxes               |   | $        | 215        |     | $          | (2,638   | )      | $ | (2,379 | ) |
| Income tax provision (benefit)                  |   | 86       |       | (941     | )          | (846     | )      |
| Net income (loss) from discontinued  operations |   | $        | 129        |     | $          | (1,697   | )      | $ | (1,533 | ) |
|                                            |   |     |       |     |       |     |   |
| Earnings per share:                             |   |     |       |     |       |     |   |
| Discontinued operations — Diluted          |   | $        | .03        |     | $          | (.40     | )      | $ | (.36 | ) |

 

16

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**Note 9. Income Taxes**

 

Thecomponents of income before U.S. and foreign income taxes are:

 
| ** ** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002**  | ** ** |
|------------|------------|----------|------------|----------|------------|-----------|------------|
| Domestic   |       | $        | 10,567,000 |     | $          | 4,491,000 |       | $ | (8,365,000 | ) |
| Foreign    |       | 121,000  |       | (242,000 | )          | (18,000   | )          |
|       |       | $        | 10,688,000 |     | $          | 4,249,000 |       | $ | (8,383,000 | ) |

 

Theprovision for income taxes is comprised of the following:

 
| ** **                           | ** ** | **2004**  | ** ** | **2003**  | ** ** | **2002**   | ** ** |
|--------------------------------------|------------|-----------|------------|-----------|------------|------------|------------|
| Current —                       |       |      |       |      |       |       |       |
| Federal                              |       | $         | 3,487,000  |      | $          | 1,208,000  |       | $ | (945,000 | ) |
| State                                |       | 568,000   |       | 261,000   |       | (337,000   | )          |
| Foreign                              |       | 235,000   |       | 187,000   |       | 274,000    |       |
|                                 |       | 4,290,000 |       | 1,656,000 |       | (1,008,000 | )          |
|                                 |       |      |       |      |       |       |       |
| Deferred —                      |       |      |       |      |       |       |       |
| Federal                              |       | (6,000    | )          | 214,000   |       | 918,000    |       |
| State                                |       | (33,000   | )          | (31,000   | )          | 19,000     |       |
| Foreign                              |       | (221,000  | )          | (319,000  | )          | (329,000   | )          |
|                                 |       | (260,000  | )          | (136,000  | )          | 608,000    |       |
|                                 |       | $         | 4,030,000  |      | $          | 1,520,000  |       | $ | (400,000 | ) |
|                                 |       |      |       |      |       |       |       |
| Allocation of total provision — |       |      |       |      |       |       |       |
| Continuing operations                |       | $         | 3,944,000  |      | $          | 2,461,000  |       | $ | 446,000 |   |
| Discontinued operations              |       | 86,000    |       | (941,000  | )          | (846,000   | )          |
| Total provision                      |       | $         | 4,030,000  |      | $          | 1,520,000  |       | $ | (400,000 | ) |

 

Areconciliation between the provisions for income taxes, computed by applyingthe Federal statutory rate to income before

taxes,and the book provisions for income taxes follows:

 
| ** **                                                | ** ** | **2004** | ** ** | **2003** | ** ** | **2002**  | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| Tax provision (benefit) on book income at  statutory rate |       | $        | 3,641,000  |     | $          | 1,445,000 |       | $ | (2,850,000 | ) |
| Increases (decreases) resulting from:                     |       |     |       |     |       |      |       |
| State income taxes, net of Federal income  tax benefit    |       | 353,000  |       | 152,000  |       | (210,000  | )          |
| Nondeductible goodwill                                    |       | —   |       | —   |       | 2,698,000 |       |
| Federal tax credits                                       |       | —   |       | —   |       | 13,000    |       |
| Other                                                     |       | 36,000   |       | (77,000  | )          | (51,000   | )          |
| Provision for income taxes                                |       | $        | 4,030,000  |     | $          | 1,520,000 |       | $ | (400,000 | ) |

 

Deferredincome taxes result from temporary differences in the recognition of income andexpenses for tax and financial statement purposes. The tax effects of thesignificant temporary differences that comprise the deferred tax assets andliabilities at year end are as follows:

 
| ** **                            | ** ** | **2004**  | ** ** | **2003** | ** ** |
|---------------------------------------|------------|-----------|------------|----------|------------|
| Accounts receivable                   |       | $         | 503,000    |     | $          | 477,000 |   |
| Inventory                             |       | 330,000   |       | 296,000  |       |
| Accrued liabilities                   |       | 1,144,000 |       | 979,000  |       |
| Canadian operating loss carryforwards |       | 954,000   |       | 732,000  |       |
| Other                                 |       | (164,000  | )          | (245,000 | )          |
| Net deferred tax asset                |       | $         | 2,767,000  |     | $          | 2,239,000 |   |
|                                  |       |      |       |     |       |
| Property, plant and equipment         |       | $         | 6,461,000  |     | $          | 6,184,000 |   |
| Other                                 |       | 164,000   |       | 173,000  |       |
| Net deferred tax liability            |       | $         | 6,625,000  |     | $          | 6,357,000 |   |

 

17

----

 

Noprovision for U.S. taxes has been made for undistributed earnings of theforeign subsidiaries since it is expected that the major portion of suchearnings will continue to be reinvested for an indefinite period. The Companyhas Canadian net operating loss carryforwards that expire between 2009 and2011. Management believes that it is more likely than not that the Company willgenerate sufficient taxable income in the appropriate carryforward periods torealize the benefit of the Canadian net operating loss carryforwards.

 

**Note 10. Segment Information**

 

TheCompany’s operations are organized and managed by product type. The Companycurrently operates in three segments of the building products industry:Commercial Products, Residential Products and Aluminum Extrusions. See thefront cover for a description of the products of each segment and the backcover for a listing of the subsidiaries of each segment.

 

TheCompany uses a portion of its aluminum extrusion production in its Commercialand Residential segments. Transfers are made at market prices. Accountingpolicies for the segments are the same as those described in Note 1. TheCompany evaluates performance based on operating income or loss before anyallocation of corporate overhead, interest or taxes.

 

Thefollowing is significant financial information by operating segment,reconciling to the Company’s totals.

 
| ** **          | ** ** | **Sales**                  | ** ** | **Operating Income**              | ** ** |
|---------------------|------------|----------------------------|------------|-----------------------------------|------------|
| **(In  thousands)** | ** ** | **2004**                   | ** ** | **2003**                          | ** ** | **2002** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Commercial          |       | $                          | 99,807     |                              | $          | 98,044 |   | $ | 108,945 |   | $ | 8,335 |   | $ | 6,782 |   | $ | 10,862 |   |
| Residential         |       | 65,355                     |       | 53,784                            |       | 44,941 |   | 11,049 |   | 8,581 |   | 163 |   |
| Aluminum Extrusion  |       | 97,378                     |       | 83,173                            |       | 85,946 |   | 709 |   | (209 | ) | (2,181 | ) |
| Total segments      |       | 262,540                    |       | 235,001                           |       | 239,832 |   | 20,093 |   | 15,154 |   | 8,844 |   |
| Eliminations        |       | (49,506                    | )          | (42,452                           | )          | (48,403 | ) | (668 | ) | (422 | ) | 693 |   |
| Corporate           |       | —                     |       | —                            |       | — |   | (8,982 | ) | (7,830 | ) | (7,581 | ) |
| Total               |       | $                          | 213,034    |                              | $          | 192,549 |   | $ | 191,429 |   | $ | 10,443 |   | $ | 6,902 |   | $ | 1,956 |   |
|                |       | ** **                 | ** ** | ** **                        | ** ** |
|                |       | **Capital Expenditures**   | ** ** | **Depreciation and Amortization** | ** ** |
| **(In  thousands)** | ** ** | **2004**                   | ** ** | **2003**                          | ** ** | **2002** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Commercial          |       | $                          | 542        |                              | $          | 1,091 |   | $ | 6,343 |   | $ | 1,820 |   | $ | 1,972 |   | $ | 1,863 |   |
| Residential         |       | 2,075                      |       | 687                               |       | 1,017 |   | 1,847 |   | 2,094 |   | 2,126 |   |
| Aluminum Extrusion  |       | 519                        |       | 789                               |       | 4,032 |   | 2,481 |   | 2,509 |   | 2,482 |   |
| Total segments      |       | 3,136                      |       | 2,567                             |       | 11,392 |   | 6,148 |   | 6,575 |   | 6,471 |   |
| Corporate           |       | 346                        |       | 280                               |       | 456 |   | 378 |   | 410 |   | 517 |   |
| Total               |       | $                          | 3,482      |                              | $          | 2,847 |   | $ | 11,848 |   | $ | 6,526 |   | $ | 6,985 |   | $ | 6,988 |   |
|                |       | ** **                 | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                |       | **Total Assets**** ** | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(In  thousands)** | ** ** | **2004**                   | ** ** | **2003**                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Commercial          |       | $                          | 60,922     |                              | $          | 59,397 |   |   |   |   |   |   |   |   |   |
| Residential         |       | 27,105                     |       | 25,135                            |       |   |   |   |   |   |   |   |   |
| Aluminum Extrusion  |       | 38,130                     |       | 36,016                            |       |   |   |   |   |   |   |   |   |
| Total segments      |       | 126,157                    |       | 120,548                           |       |   |   |   |   |   |   |   |   |
| Corporate           |       | 15,725                     |       | 12,695                            |       |   |   |   |   |   |   |   |   |
| Total               |       | $                          | 141,882    |                              | $          | 133,243 |   |   |   |   |   |   |   |   |   |

 

18

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**Note 11. Current and Pending Accounting Changes**

 

Currentand pending accounting pronouncements are not expected to have a significantimpact on the Company’s results of operations or financial position.

 

**Note 12. Change in Accounting**

 

TheCompany adopted SFAS No. 142, “Goodwill and Other Intangible Assets” effectiveJuly 1, 2001, which required that existing goodwill be reviewed forimpairment using a revised methodology. The Company completed the transitionalimpairment test and determined that a $7,935,000 non-cash transition charge wasrequired to reduce goodwill. The transition charge is reflected as a cumulativeeffect of an accounting change effective July 1, 2001.

 

19

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**CORPORATEINFORMATION**

 
| **DIRECTORS**                                   | ** ** | **OFFICERS**                                                                                                                                                    |
|-------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                            |       |                                                                                                                                                            |
| Cornelius  C. Vanderstar                        |       | David  C. Treinen                                                                                                                                               |
| Chairman  of the Board                          |       | President;  Secretary                                                                                                                                           |
| Chief  Executive Officer                        |       | Chief  Operating Officer                                                                                                                                        |
|                                            |       |                                                                                                                                                            |
| David  C. Treinen                               |       | Ronald  L. Rudy                                                                                                                                                 |
|                                            |       | Senior  Vice President — Operations                                                                                                                        |
| Ronald  L. Rudy                                 |       |                                                                                                                                                            |
|                                            |       | Mitchell  K. Fogelman                                                                                                                                           |
| David  M. Antonini                              |       | Senior  Vice President — Finance                                                                                                                           |
| Partner  in White, Nelson & Co. LLP         |       |                                                                                                                                                            |
|                                            |       | Stanley  M. Kutch                                                                                                                                               |
| John  P. Cunningham                             |       | Vice  President — Information Systems                                                                                                                      |
| Retired  President of                           |       |                                                                                                                                                            |
| International  Aluminum Corporation             |       | Susan  L. Leone                                                                                                                                                 |
|                                            |       | Vice  President — Human Resources                                                                                                                          |
| Alexander  L. Dean                              |       |                                                                                                                                                            |
| President  of David Brooks Company              |       |                                                                                                                                                            |
|                                            |       | **FINANCIAL INFORMATION ON CORPORATE WEBSITE**                                                                                                                  |
| Joel  F. McIntyre                               |       |                                                                                                                                                            |
| Attorney  At Law                                |       | The  Company makes available on its website, www.intlalum.com, its reports on Form  10-K and 10-Q as soon as reasonably practicable after they have been filed. |
|                                            |       |                                                                                                                                                            |
| **STOCK TRANSFER AGENT AND REGISTRAR**          | ** ** | **ELECTRONIC TRANSFER OF DIVIDENDS**                                                                                                                            |
|                                            |       |                                                                                                                                                            |
| Continental  Stock Transfer & Trust Company |       | For  information and forms, write to:                                                                                                                           |
| 17  Battery Place                               |       | Corporate  Secretary                                                                                                                                            |
| New  York, NY 10004                             |       | International  Aluminum Corporation                                                                                                                             |
| (212)  509-4000                                 |       | P.  O. Box 6                                                                                                                                                    |
| Internet  at www.continentalstock.com           |       | Monterey  Park, CA 91754                                                                                                                                        |
|                                            |       |                                                                                                                                                            |
| **STOCK EXCHANGE LISTING**                      | ** ** | **ANNUAL SHAREHOLDERS MEETING**                                                                                                                                 |
|                                            |       |                                                                                                                                                            |
| The  Company’s common stock (trading       |       | 2  p.m., Thursday, October 28, 2004                                                                                                                        |
| symbol:  IAL) is listed on the New York         |       | International  Aluminum Corporation                                                                                                                             |
| Stock  Exchange                                 |       | 767  Monterey Pass Road                                                                                                                                         |
|                                            | ** ** | Monterey  Park, CA 91754                                                                                                                                        |

 

20

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**SUBSIDIARIESBY SEGMENT**

 
| **COMMERCIAL**                                                | ** ** | **RESIDENTIAL**                                |
|---------------------------------------------------------------|------------|------------------------------------------------|
|                                                          |       |                                           |
| *Douglas R. Ellerbrock*                                       | * *   | *George L. Hall*                               |
| *Executive Vice President*                                    | * *   | *Executive Vice President*                     |
| *Commercial Products Group*                                   | * *   | *Residential Products Group*                   |
|                                                          |       |                                           |
| **Exterior Products**                                         |       | International  Window Corporation              |
|                                                          |       | South  Gate, California                        |
| United  States Aluminum Corporation                           |       |                                           |
| Vernon,  California                                           |       | International  Window-Northern California      |
|                                                          |       | Hayward,  California                           |
| United  States Aluminum Corporation-Illinois                  |       |                                           |
| Bedford  Park, Illinois                                       |       | International  Window-Arizona, Inc.            |
| Boston,  Massachusetts                                        |       | Phoenix,  Arizona                              |
| Detroit,  Michigan                                            |       |                                           |
|                                                          |       |                                           |
| United  States Aluminum Corporation-Texas                     |       |                                           |
| Waxahachie,  Texas                                            |       |                                           |
| Denver,  Colorado                                             |       |                                           |
| St.  Louis, Missouri                                          |       |                                           |
| Dallas,  Texas                                                |       |                                           |
| Houston,  Texas                                               |       |                                           |
|                                                          |       |                                           |
| United  States Aluminum Corporation-Carolina                  |       |                                           |
| Rock  Hill, South Carolina                                    |       |                                           |
| Atlanta,  Georgia                                             |       |                                           |
| Baltimore,  Maryland                                          |       |                                           |
|                                                          |       |                                           |
| United  States Aluminum Of Canada–British Columbia, Ltd. |       |                                           |
| Langley,  British Columbia, Canada                            |       |                                           |
|                                                          |       |                                           |
| United  States Aluminum Of Canada–Ontario, Ltd.          |       |                                           |
| Guelph,  Ontario, Canada                                      | * *   |                                           |
|                                                          |       |                                           |
|                                                          | ** ** | **ALUMINUM EXTRUSION**                         |
| **Interior  Products**                                        | ** ** | ** **                                     |
|                                                          |       | International Extrusion Corporation            |
| Raco  Interior Products, Inc.                                 |       | Alhambra,  California                          |
| Houston,  Texas                                               |       |                                           |
| Waxahachie,  Texas                                            |       | **International  Extrusion Corporation-Texas** |
| Dallas,  Texas                                                |       | Waxahachie,  Texas                             |

 

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